Steve Webb has defended the UK government’s decision to leave the current regulatory environment – whereby pension matters are jointly overseen by the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) – unchanged, insisting the idea of reforming the system was “not in my in-tray”.The pensions minister’s comments come shortly after outgoing National Association of Pension Funds (NAPF) chairman Mark Hyde Harrison said the split was “increasingly unsustainable” in light of auto-enrolment.Webb reasoned, while addressing the NAPF annual conference in Manchester, that in light of the number of changes already underway within the UK pension system, it was not the right time for a wholesale reorganisation.“Let me ask a rhetorical question,” the Liberal Democrat MP said. “In the midst of automatic enrolment, the end of contracting out, worries about pensions liberation fraud, tackling small pots and a big upheaval generally and all of that, is now the time to restructure the regulatory regime?” He said that, “on balance”, his view was it was not the right time for change, but admitted there were “certainly” issues within the current arrangement that saw areas of the pensions market overseen by his own Department for Work & Pensions (DWP), the Treasury, the FCA and TPR that needed improving.But he added: “At the moment, the idea of writing a new regulatory regime is not in my in-tray, I have to say.”His comments come after Hyde Harrison, now succeeded by Rushton Smith as the group’s chairman, insisted that reform was needed, despite the difficulties it could entail.The former chief executive of the Barclays UK Retirement Fund said that, due to auto-enrolment – which allows both FCA-regulated, contract-based arrangements and trust-based schemes overseen by TPR to be used – the split would “become increasingly apparent – and increasingly unsustainable”.“Any shift won’t be easy – I recognise that,” he said during the conference’s opening address. “But it doesn’t mean we should dodge the issue.“The priority has to be ensuring better and fairer pensions for people. We need the right regulatory environment to help us achieve that.”Calls for a single pensions regulator have come from a number of sources, most notably from the National Audit Office and the parliamentary committee on work & pensions.However, a single regulator has been rejected both by the DWP and a junior Treasury minister, while the chairman of TPR, Michael O’Higgins, said reform to the regulatory system would be unwise.
The study used the WM Common Investment Fund universe – with total assets of £4bn (€4.7bn) as at 31 December 2012 – as a proxy.The results show that even a small over-distribution or under-distribution can have a significant effect on the real value of a portfolio over 20 years.With 2% taken out of the portfolio above the 3% sustainable level, its value would be reduced by 33% over the period.Conversely, under-spending by 2% per annum would add nearly 50% to the real value of the portfolio after 20 years.By reviewing all 10 and 25-year periods over the last 113 years, Newton found that holding more in equities increases the overall probability of maintaining the purchasing power of invested capital, albeit at the cost of greater volatility in the short term.However, even over 25-year cycles, no combination of asset allocation and withdrawal rate gave an implied 100% probability of maintaining the real purchasing power of capital.Over a 10-year horizon, there was a one-in-five chance even an all-equity portfolio distributing just 2% per annum would have failed to protect the real value of an average charity’s capital.The research also finds that charities can significantly reduce the volatility of their income by adopting a ‘smoothing’ withdrawal policy.This sets annual spending as a percentage of the average of several years’ (say five) portfolio values, rather than just operating according to a year-by-year framework.To ensure a sustainable distribution rate, the report suggests a number of practical approaches trustees should consider: The judicious use of spending reviews to bring spending back towards a sustainable 3% levelSpending income, but not capital, and investing for greater levels of capital growthManaging the downside in investment returns by actively managed strategiesUsing a formula to smooth withdrawalsAndrew Pitt, head of charities at Newton, said: “The current financial backdrop is increasingly challenging the assumptions investors make about future returns. The key question for charity trustees is: what is a reasonable level of annual withdrawal to take from a portfolio without depreciating its long-term value?“Our research shows what constitutes a sustainable rate of withdrawal for a charity to make from its investment portfolio. The most important implication of our analysis is that charity trustees should address this topic as part of the regular review of their portfolio.”The report can be downloaded here. UK charities spending more than 3% of the value of their long-term investment portfolios each year face a significant risk of eroding the real value of their capital, according to a report.While many charities are withdrawing 4% of their capital every year – in the belief that investment returns will maintain the purchasing power of their remaining endowment – the report says this may be unsustainable if the real value of capital is to be preserved.“Sustainable Portfolio ‘Withdrawal Rates’ for Charities”, from Newton Investment Management, suggests the typical portfolio operated by UK charities, made up of 60% equities and 40% bonds, has generated a long-term return of just 3%.Withdrawing 4% a year will therefore reduce the real value of a portfolio by one-sixth over 20 years.
In November 2013, Klaus Wiedner, head of pensions and insurance at the directorate general internal market, said its plan included solving cross-border issues and creating a framework that allowed pension funds to grow.“Retention of the fully funded requirement will not help attain that objective and would hamper IORPs’ willingness to engage in cross-border activities,” Roberts said. “And removal would make cross-border IORPs less expensive and less burdensome by aligning the rules to those for domestic IORPs.“Respondents to a green paper previously mentioned the full funding requirement as a major obstacle to cross-border activity. It also would have been coherent with overall EU policy in the pensions area, the Europe 2020 strategy and the green paper on long-term investment.“This option is not expected to generate costs. On the contrary, it is expected to generate significant gains. In particular, it will provide significant economic benefits to employees, employers and IORPs.”However, responding to an IPE question regarding the last-minute decision by the Commission to maintain the status quo, Wiedner said the Commission foresaw potential obstables in cross-border provision if full funding requirements were dropped.“We thought that, on balance, it was still better to keep that fully funded requirement because we obviously want cross-border trade, we want to make sure it is a sound cross-border provision of services,” he said.The initional inclusion of relaxed funding requirements was widely welcomed by the European pensions industry.Hans van Meerten of Clifford Chance in the Netherlands said that, despite the Directive being a positive step forward, the keeping of full funding requirements was disappointing.“The lobby has tried very hard to keep the pillar one [solvency] requirements out of the Directive, and the result is that we are faced with one that promotes the further shift to individual DC,” he said.Paul Bonser, head of the cross border consulting team at Aon Hewitt, said the move was effectively “discrimination”, as the Commission continued to treat cross-border pensions more harshly than others.“It is effectively discrimination, which the Commission is trying so hard to erase in most other areas,” he said.“Many within the pensions industry will question why this was reintroduced from the previous leaked version that was recently in circulation.“This will undoubtedly continue to limit the ability of multinationals, headquartered in certain markets such as the UK, Netherlands, Germany and Ireland, to use their home country pension funds for cross-border activity.” The confirmed retention of the need for cross-border pension schemes to be fully funded runs contrary to the European Commission’s aims for retirement provision in the union, experts have said.The Commission today published the newly revised IORP Directive, and while no change was made to cross-border funding, it represented a last-minute change of heart.Initial drafts included the provision for pension schemes operating in two or more member states to be regulated by the same standards as single-border schemes, in essence creating a provision for unfunded cross-border activity.Dave Roberts, senior consultant at Towers Watson, said the industry’s expectation was not wishful thinking, but rather believing a stance made by the Commission itself.
“If I hedged the currency, I can also stay in Germany,” he added.The managing director also spoke fondly of the opportunities afforded to it by leveraging its direct real estate investments, at one point saying leverage of 70% could be possible.“Why not? If interest rates are rising, I pay back the leverage,” he told delegates.He said that the WPV, which receives annual contributions of around €170m a year, could simply use some of these cashflows. As a result, he argued there was no risk to the fund, as any negative impact from the leverage could simply be paid off.Korfmacher also said that the fund was interested in infrastructure debt, and had already sought exposure to infrastructure equity.“Of course, we’d only invest in infrastructure debt through funds – we are too small to think about doing direct investments.“I think infrastructure is the asset class of the future,” he said, noting that in the absence of bank loans, infrastructure would be a good substitute. The managing director of Germany’s pension fund for auditors and chartered accountants (WPV) has questioned why the €2.3bn fund should invest in overseas property if the cost of hedging the investment exceeds its benefits.Hans-Wilhelm Korfmacher told the IP Real Estate Global Awards in Munich last week that he had, on several occasions in the past, considered diversifying WPV’s real estate exposure into new markets such as Australia.“I was really convinced,” he said of a potential investment in Australia. “It was good timing, I liked the country, I liked the market, I liked the legal system – I liked everything, but I didn’t like the cost of currency hedging.Korfmacher said that he had therefore decided not to proceed with the Australian investment. “In some countries, I cannot afford to hedge – for example Australia, it’s too expensive.
“We are taking the view that they will continue the exemption,” the source added.Helle Gade, chief consultant at the Danish pension and insurance association (F&P), said that she was uncertain if the Commission would extend the exemption, but that in the association’s view an extension will be needed in the short run.“We would prefer that central counterparties (CCPs) could allow for other instruments than cash to post as collateral, but since there has been no development to allow for the use of other instruments as collateral, we believe there is a need to extend the exemption.”The European Securities and Markets Authority (ESMA) has recently concluded a consultation on the types of assets, besides cash, that the industry could use as collateral.However, PensionsEurope raised concerns about the use of government bonds, as the supervisor had proposed an overall limit on the types of bonds eligible as collateral, potentially leading to increase costs as they trade to acquire eligible assets.According to a joint presentation by the European Insurance and Occupational Pensions Authority’s stakeholder groups for occupational pensions and insurance matters in July, the cost of centrally clearing for Dutch IORPs alone could be between €1.5-4.5bn.The Occupational Pensions Stakeholder Group recommended that the exemption from central clearing should only begin once mandatory clearing gets underway, essentially extending the exemption until 2018. Confusion reigns within the pension industry over the European Commission’s stance on an industry exemption from regulation that would require it to centrally clear derivatives trades.The exemption, granted under the European Markets Infrastructure Regulation (EMIR) in 2012, is set to expire in a year. It is understood that the Commission was this week due to consider a report on extending the deadline further.Asked by IPE, a spokesman for the Directorate General Internal Market would only say that its report on the matter to the European Parliament and European Council – comprising representatives of each member state government – would be endorsed in the coming weeks.A person familiar with the situation at a large UK pension fund said it would be “useful” if the Commission decided a continuation of the exemption was needed.
Hermes Investment Management chief economist Neil Williams said the move meant Draghi was addressing the symptoms of the crisis rather than its cause.“Tackling the causes of the euro-zone crisis needs years of work and more than just QE – which, as we know from the US and UK, is a blunt instrument more likely to generate asset-price than ‘feel-good’ demand, inflation,” he said.He said the challenge now was to make sure deflation did not take root in the currency union, like in Japan.“QE has been running [in Japan] for 16 years with little inflation impulse,” he said.“The ECB’s ‘tap’ may be finally on, but, as Japan found out, QE acts like a drug – the more you use it, the more you need it. Euro-zone QE could thus be with us for many years to come.” Nick Gartside, fixed income CIO at JP Morgan Asset Management, said there would be positive implications for European high yield and peripherals, along with riskier assets.“Draghi left unsaid what this inevitably does to the currency,” he said.“You’re looking at the euro likely approaching parity with the US dollar, certainly by the end of the year. Ultimately, that will bring inflation into the region, but longer term the question is whether that will be the right kind of inflation.”CIO at Deutche Asset and Wealth Management, Johannes Müller, said the most lasting effect would be a weaker currency, boosting corporate profits and thus positive for equity markets“Falling bond yields have been driven primarily by declining rates of inflation and inflation expectations, as well as speculation about ECB policy,” he said. “As we do not expect inflation trends to reverse any time soon, returns from bond markets should continue to trade friendly in the short term.”Paras Anand, head of European equities at Fidelity, said the announcement had a negligible “awe” factor.“I wonder whether the ECB’s willingness to expand its balance sheet to stimulate growth had more impact as a latent lever as opposed to one that has been deployed,” he said.Anand was critical of the risk-sharing measure put in place over the bond purchases, which sees a complicated split of risk among national central banks and euro-zone members as a whole.Some 8% of losses stemming from defaults on national government bonds will be shared equally across member states, with 92% absorbed by the central banks purchasing the bonds.Anand said links across the euro-zone were quietly rebuilding from an economic and political perspective.“What we have seen, encouragingly, has been a form of pragmatism – a deferral to informal understanding and an attention to the spirit of collaboration across the single market rather than a constant recourse to the rule book,” Anand said. “I fear the current programme with its focus on ultimate recourse and legal obligations under various negative scenarios is pulling us in the opposite direction.” Asset managers have welcomed further attempts by the European Central Bank (ECB) to stave off deflation and kick-start the economy but warned against unfounded optimism about the measure.Yesterday, ECB president Mario Draghi announced a nearly €1.1trn quantitative easing measure, adding to previous purchases of asset-backed securities and its targeted longer-term refinancing operations.The ECB said the measure was required to ensure the single currency’s inflation would run “below but closer to 2%”. Asset purchasing will be conducted by the national central banks but coordinated from Frankfurt.
A new pensions system in the Netherlands focusing on individual pensions accrual could end in failure as a result of disagreement within the pensions sector, Coen Teulings, former director of the Bureau for Ecomomic Policy Analysis (CPB), has warned. Speaking at an event for economists organised by supervisor De Nederlandsche Bank (DNB), Teulings cited the UK and the US as examples of countries where individual systems had failed.He said discord was “one of the seven scourges” preventing the Dutch pensions sector from approaching politicians in The Hague with a single voice.“Given the complexity of pensions, this is bad,” he said, reiterating his previous call for the sector to take the initiative in the reform of the system. Peter Borgdorff, director of the €161bn healthcare scheme PFZW, echoed Teulings’s view that pension funds did not excel in operating jointly.But he argued that the sector had learned from the experience leading up to the new financial assessment framework (nFTK).He added that a Dutch Pensions Federation working group, chaired by an external expert, was “trying to find common ground – albeit a position with options”.Teulings, meanwhile, said the Dutch pensions system was under threat from a “too low tax burden” for the self-employed, the separation of pension funds and their providers, low returns, and the ongoing dispute between younger and older generations about average pension contribution and accrual.He suggested that the salary ceiling for tax-friendly pensions accrual – currently set at €100,000 – could be lowered again, following pressure in particular from “left-leaning political parties”.He said the regulator was an “additional plague” and that it discouraged pension funds from taking investment risk “when taking these risks is necessary due to the continuing low interest environment”.
Capital Cranfield Trustees – Martin Flavell and Stella Girvin have joined the independent trustee company as client directors. Flavell has previously worked at BAE Systems, Plessy and GEC-Marconi but joins from Italian tech company Finmeccania, where he was UK head of human resources. Girvin spent 14 years with Travis Perkins as pensions manager and, more recently, head of compliance and standards before her move. She began her career at Mercer and in May was appointed to the board of the Standard Life Master Trust. Northern Trust – Bo Thulin has been named head of the custodian bank’s Nordic business, joining from JP Morgan. Thulin was previously JP Morgan’s head of investor services for Sweden and Norway but will expand his remit into Finland and Denmark as part of the new role, where he will report to the head of institutional investor group EMEA Penelope Briggs.State Street Global Advisors – Altaf Kassam has been named head of EMEA investment strategy and research. He joins from MSCI but has also worked at UBS Investment Bank, Deutsche Bank and Goldman Sachs.Standard Life Investments – Peter in de Rijp has been named investment director for the Benelux. In this newly created position, he is to focus on business development, working with the company’s Dutch investment director Johan Langerak. In de Rijp joins from SEI Investments, where he was managing director of client services, joining in 2006 as managing director of sales for the Netherlands. Prior to this, In de Rijp was senior account manager at Fortis Investments and account manager at AMEV Pension Fund Services. PensionsEurope, European Parliament, ACPR, Angelo Gordon, MAN Group, Aviva Investors, Comac Capital, Capital Cranfield, Northern Trust, JP Morgan, State Street, MSCI, Standard Life, SEI InvestmentsPensionsEurope – Pekka Eskola has joined the European industry group as economic adviser. Eskola joins from the European Parliament, where he spent nearly nine years as economic and policy adviser to its vice-president and other MEPs on matters of economic governance and social protection. He replaces Thomas Montcourrier, who left PensionsEurope in October after four years to join ACPR, the French Prudential supervisory authority. The association last week announced that the managing director of Shell’s Dutch pension fund, Janwillem Bouma, had been elected as its chairman, replacing Joanne Segars.Angelo, Gordon & Co – Jenny Morton has been named head of consultant relations, joining the alternative investment manager from MAN Group. At Man, she was global head of consultant relations and has held similar roles at Putman, Fidelity International and Boston Partners Asset Management.Aviva Investors – Michael Grady has been named senior economist and strategist, joining from Comac Capital. Grady, who will be based in London, has previously worked for the Bank of England, where he was senior manager in the markets directorate.
Mercer has suggested Dutch pension funds should abandon any hope that low funding ratios will improve on the back of rising interest rates.Commenting on the European Central Bank’s (ECB) latest monetary policy decisions, Dennis van Ek, an actuary at the consultancy, said the examples of Sweden, Switzerland and Japan gave him reason to believe the combined measures would lead to a further drop in interest rates in the coming months.“The ECB’s announcement has taken the bottom out of the market,” he said.“The 30-year swap rate now could even go below the 0.7% mark, which was briefly hit in April 2015.” Van Ek noted that, on Friday morning, the 30-year swap rate – the main benchmark for pension funds for discounting their liabilities – was very volatile, fluctuating between 1.09% and 1.24%.This was higher, however, than the 1.15% just before the ECB’s announcement and the subsequent volatility immediately afterwards.The swap rate stood at 1.17% on Monday morning.Van Ek noted that, in the immediate wake of the EBC decision, two of Mercer’s pension fund clients decided to hold on to their interest hedges of 65% and 75%, respectively.“Up to then, they had been considering reducing their hedges, as they assumed the ECB would not lower interest rates any further,” he said.The actuary made clear that a 0.5-percentage- point drop in the swap rate would lead to an increase of liabilities of 10%.“Because pension funds have applied an interest hedge of 40% on average,” he added, “this means a funding drop of 6 percentage points.”The pensions adviser highlighted that pension funds would also incur additional costs as a result of the announced reduction of the deposit rate from -0.3% to -0.4%.“Pension schemes often deposit the liquid assets they have to keep as a security for their swaps with banks,” Van Ek said. “This often amounts to 10% of the swaps’ nominal value.”.He estimated that pension funds would soon have to pay a deposit rate of 0.45%.On a positive note, however, the consultant noted that equity markets had largely recovered from the large dip over the past months.He concluded this meant a funding increase of a “couple of percentage points” for pension funds.
Representatives of the SDGI Agenda signatories with minister PloumenThe report acknowledges questions around the “investability” of the SDGs, and that research into this is limited.However, therein the financial institutions state that “we assert that a lot more can be done to ‘crowd in’ additional investment across asset classes and across the societal and environmental themes that are incorporated by the Sustainable Development agenda”.The Dutch initiative can be seen as a further sign of the rise of the impact investing, or at least the alignment of finance with societal and environmental goals, among some parts of the institutional investment world. In September, Dutch pension investors PGGM and APG were already among European investors that put their name to a commitment to increasingly align their investing with the SDGs.Finnish pensions insurer Ilmarinen recently said it was aiming to double the volume of its direct equity investment related to solutions for sustainable development by 2020; this is focused on environmental aspects.Also, the European Commission recently announced plans for the European Fund for Strategic Investments (EFSI) to be more orientated towards financing clean energy and other green economy projects, which has a degree of overlap with the SDGs.The EFSI is part of an attempt to mobilise more private sector capital for investment in the EU economy – which the Commission believes it is doing. The group of Dutch financial institutions said $5trn (€4.7trn) to $7trn in financing is needed each year to achieve the SDGs for 2030 but that “a ‘crowding in’ of private and institutional SDG investment … is not happening at the right pace and scale yet”. In a statement, the group said it “believes it is not only of societal importance but also in the interest of their investors and business relations to consider the largest social and environmental challenges of our time in their work and investments”.The institutions’ stance on investing to achieve the SDGs and concrete recommendations for “SDGI action” are formulated in a report presented to the Dutch minister for foreign trade and development cooperation, Lilianne Ploumen, at a Global Impact Investing Network (GIIN) conference last week.The government has been involved in the process leading up to this report, however, which, according to a statement, is the outcome of six months of consultation with more than 70 investors, government representatives and “expert practitioners”.The report was also presented to Frank Elderson, executive director of the De Nederlandsche Bank (DNB), the Dutch central bank and pensions regulator; a “cross-sectoral consultation” meeting is due to take place at DNB on Wednesday.Carolien de Bruin, chief executive at social enterprise C-Change, co-facilitator of the SDGI agenda initiative, told IPE 30 representatives from Dutch financial institutions would be involved in the meeting on Wednesday in addition to government and DNB officials.“After the more celebratory launch at the GIIN conference last week, the meeting is about getting to action,” she said. “We will be discussing the agenda recommendations in working groups and jointly plan for the year ahead.”The group’s SDGI Investing Agenda is about maximising investing in the Netherlands and abroad to meet the SDGs.It calls on – “invites” – the Dutch government and DNB to take action in four priority areas alongside the finance industry, and made recommendations for each of these.The goals for the four areas are, in the words of the consortium:1. Catalyse significant SDG investment through the systematic deployment of blended finance instruments2. Make SDG investment the ‘new normal’ by encouraging and enabling all Dutch retail investors to invest with impact3. Establish an enabling SDGI data environment by stimulating the uptake of sustainability indicators and standards4. Identify and address actual and perceived regulatory barriers and incentives to SDG investmentRecommendations to achieve the first goal include pooling institutional funds and resources to enable economies of scale and further adoption among smaller institutions like pension funds – a recommendation aimed jointly at the government and financial sector – and setting targets for SDG investing where feasible – a step for the finance industry to take of its own accord.‘Investability’ questions#*#*Show Fullscreen*#*# Major Dutch financial institutions, including the country’s largest pension investors, have committed to an investment agenda pivoting around the UN Sustainable Development Goals (SDGs) for 2030.The 18-strong group* includes the asset managers for the €179bn healthcare pension fund PFZW and €372bn civil service pension scheme ABP, and insurance companies and banks.It has developed what they call an agenda for “SDG investing (SDGI)”, based around increasing the amount of institutional and private capital allocated toward financing the SDGs.Set out by the UN in 2015, the SDGs are goals relating to poverty, healthcare, education, climate and other societal challenges.